UK regulator the Financial Services Authority has given a clean bill of health to the controversial electronic systems used by hedge funds to collect and analyse trading ideas and research recommendations from investment banks.

The systems have come under fire from some fund managers claiming they can encourage conflicts of interest between hedge funds and banks. Over the past few months, the FSA has looked into the systems – known as alpha capture – as part of its wider review into the hedge fund industry. It will this week publish a report clearing them of any regulatory problems. The regulator said: "The clear audit trails generated by alpha capture systems suggest the risk of this being done explicitly might be lower than through traditional communication methods." The FSA said it had discussed controls within the networks to ensure they could not be used as a conduit for inside information and found at least six examples of good practice, including the automatic notification of a bank's compliance department when an idea was submitted. However, the FSA warned the systems could be abused. "There remains a risk that those inputting ideas may do so on the basis of inside information, masking this by giving another, seemingly plausible, rationale," it said. UK hedge fund Marshall Wace operates the largest such system, called Tops, which controls $5.5bn (€4.4bn) of assets and has outperformed other hedge funds. Its success has encouraged others to develop similar systems. Ten of Europe's largest investment banks formed a consortium two years ago called Trade Ideas to build a network for distributing their trading ideas to institutional clients. Gartmore, a UK fund manager, is looking at ways to adapt its system to spot patterns in the way analysts' earnings estimate change.